Key points:
- The EU’s Carbon Border Adjustment Mechanism (CBAM) is primarily designed to prevent carbon leakage from the EU by putting a price on the environmental damage caused by carbon emissions in countries which export certain products to the EU. However, it also aims to encourage decarbonisation in countries from which the EU sources its imports.
- The CBAM’s design encourages exporting countries to develop domestic carbon pricing mechanisms as a way to reduce the fees for goods entering the EU, and keep the revenue from carbon pricing within their own borders.
- Despite the controversy associated with the CBAM, some of the countries which have been most critical have also made the strategic decision to develop domestic carbon markets – in some cases, explicitly in response to the existence of the CBAM. This could enable millions of euros generated by carbon pricing to be retained in their countries.
- On this basis, there is some evidence that the CBAM is encouraging other countries to decarbonise. Should domestic carbon prices reach 50% of the EU’s, exporting countries would retain that portion of the revenue. For India, modelling suggests this would be an annual income of EUR 676 million, China would retain EUR 506 million and Brazil would gain EUR 143 million.
Rationale behind the CBAM
The EU’s Carbon Border Adjustment Mechanism (CBAM) imposes a levy on certain imports into the EU based on the level of carbon emissions associated with their production. It has faced criticism from various countries, particularly developing and emerging economies, which view it as a protectionist trade barrier.
The design of the CBAM is rooted in the principle that the polluter should pay for the environmental damage that they cause. Within the EU, this principle is already embodied in the Emissions Trading Scheme (ETS), which caps emissions from business and industry in line with the EU’s climate targets. Industrial installations have allowances to emit certain levels of greenhouse gases, and if they exceed their limit they must buy allowances from other ETS participants that have a surplus. This market establishes a price for carbon emissions within the EU.
Some emissions allowances in the ETS are currently allocated free of charge to certain installations which are deemed to be most at risk of carbon leakage by moving production to other countries with less stringent regulations and consequently higher emissions. The impetus for the CBAM was to reduce this free allocation but still ensure that EU businesses compete on a level playing field for carbon pricing with goods imported into the EU.
CBAM is currently in a transitional phase which allows both the European Commission and EU importers to learn how the reporting mechanism will work in practice. From the beginning of 2026, EU importers of goods covered by the CBAM will be required to buy CBAM certificates matching the embodied carbon in the goods they import.
How CBAM prices carbon
The certificates will be priced to reflect the cost of allowances (European Emission Allowances – EUAs) in the EU ETS. This ensures that the carbon price on goods imported into the EU is the same as the carbon price of goods produced inside the EU.
At the moment, the CBAM applies to the highest-emitting industrial sectors: cement, aluminium, fertilisers, iron and steel, hydrogen and electricity. The number of sectors covered may be extended to others at risk of carbon leakage once the European Commission has reviewed performance in the transitional Period. The European Commission is also currently considering expanding CBAM’s scope to downstream products used in manufacturing processes.
While the CBAM was primarily designed to address carbon leakage, it is also intended to encourage decarbonisation in other countries. The mechanism is designed to avoid the double pricing of carbon, so if a certain price for embedded carbon in the goods has been paid in the country of production, this will be deducted from the total number of CBAM certificates that need to be presented.
The total cost of the CBAM for importers is therefore: (embedded emissions × EUA price) – (embedded emissions × carbon price paid in exporting country).
This framework, in theory, provides incentives for exporting countries to establish a domestic carbon pricing regime. The primary reason is that this should limit the impact of the CBAM on exporting countries because the domestic cost of carbon in the exporting country will be deducted from total CBAM costs. Additionally, it would also allow the exporting country to retain the revenues resulting from its own carbon pricing regime rather than allowing these revenues to be collected by the EU.
International reactions to CBAM
The introduction of CBAM has ignited debate about how to align trade and climate goals, and concentrated attention on countries’ reactions to the measure. While the EU frames CBAM as a climate measure, other countries have concentrated on the trade impacts it will have.
The principle behind the measure has received widespread criticism outside the EU, focused on two main areas:
- The impact that CBAM might have on global trade. The BRICS countries have been particularly hostile.1There are currently 11 BRICS countries: Brazil, Russia, India, China, South Africa, Saudi Arabia, Egypt, United Arab Emirates, Ethiopia, Indonesia and Iran. The 2025 Rio de Janeiro Declaration called it “unilateral and discriminatory”, and Russia filed a complaint to the World Trade Organisation on the grounds that CBAM breaches trade agreements.
- The impacts of the levy on developing countries with limited resources to reduce the carbon intensity of their exports to the EU. This has raised the issue of climate injustice, given that the levy is being introduced by a region where economic development was based on the use of fossil fuels.
However, in tandem with these criticisms, it is also evident that some countries are developing their own domestic carbon pricing mechanisms to reduce exposure to CBAM costs. This is a pragmatic response to the reality of the CBAM’s operation and a recognition that its design means that while a carbon price must be paid, the revenues generated by carbon pricing can be kept in the exporting country rather than paid into the EU as CBAM fees. The countries introducing their own carbon pricing mechanisms include some of the BRICS countries which have also been vocal critics.
Most of these planned carbon markets have been explicitly linked to the CBAM, providing some evidence that the EU’s aim of using the mechanism to encourage decarbonisation elsewhere is at least partially being realised.
Developing domestic carbon trading
An increasing number of countries are developing carbon pricing mechanisms, whether in the form of a tax or an emissions trading scheme. There are at least 80 carbon pricing schemes in place around the world, with others being developed.2Other countries are also considering introducing their own Border Carbon Adjustment mechanism. These include Australia, Canada, Norway, Taiwan and the UK. This section outlines a number of carbon pricing schemes that have been proposed since the introduction of the CBAM, several of which are linked directly to its introduction.
Brazil
The Brazilian Emissions Trading Scheme (SBCE) became law at the end of 2024 and is scheduled to begin operating around 2030. Although the mechanism will be based on international models of cap-and-trade systems, it will also include provisions to share any benefits more equitably with traditional communities.
As well as reducing emissions, the goal of the trading scheme is to mitigate the barriers to trade that might result from border carbon adjustments such as the CBAM.
Brazil has also proposed establishing the Open Coalition for Carbon Market Integration, aiming to link carbon trading schemes internationally. The coalition would have a shared carbon emissions cap, with explicit provisions to help fund decarbonisation in countries with fewer financial resources. This is intended to support a just transition and address issues of equity associated with the unilateral nature of the CBAM. Brazil’s proposal will be one of the key focuses of discussion at COP30.
China
China led opposition to CBAM at COP29. Despite this, it has taken a strategic decision to expand the scope of its existing carbon market scheme from the power sector to include industries included in the EU CBAM such as cement, steel and aluminium.
India
Given the high level of exports of iron and steel to the EU, India is one of the most exposed countries to the CBAM. It established the Carbon Credit Trading Scheme in 2024 and is expected to begin operating in 2026. It will initially cover nine sectors, including those which are part of the CBAM.
Despite its opposition to the CBAM, India has also been negotiating with the EU to manage its impact on India’s exporters. Cooperation on the development of India’s carbon pricing to enable exporters – including small businesses – to reduce the impact of CBAM was explicitly included in the new strategic EU-India agenda announced in September 2025.
Indonesia
The Indonesian Economic Value of Carbon Trading Scheme began operating in 2023. Initially, it only covers the power sector, but it is eventually intended to increase its scope to other sectors, including those currently covered by the CBAM.
Taiwan
Taiwan introduced a carbon tax in January 2025. This scheme allows limited trading of permits from voluntary actions to reduce emissions. However, the government plans to establish an emissions trading scheme by the end of 2026. This shift to an emissions trading scheme is a direct response to the introduction of the CBAM.
Vietnam
In August 2025 Vietnam expanded its emissions trading to thermal power plants and the iron, steel and cement industries. After an initial phase of operation, the scope of the trading mechanism will be expanded to other sectors between 2027 and 2030. The scheme was developed explicitly to help address the potential costs of the CBAM.
Others
Turkey, Malaysia and Serbia are also putting carbon pricing measures in place as a way of reducing exposure to CBAM costs. Both Turkey and Malaysia have explicitly linked the measures to the implementation of CBAM.3Page 26.
What these new markets mean for countries’ exposure to the CBAM
Modelling of the impact of CBAM with and without domestic carbon pricing highlights the economic gains that stand to be made from this pragmatic response to the CBAM’s implementation. As an example, if the domestic carbon price is set at 50% of the EU’s EUA price, then border fees are roughly halved and the revenues from the carbon pricing mechanism remain in the exporting country. If domestic carbon prices are set at an equivalent level to EUA prices, then CBAM costs are effectively removed.
Figure 1 illustrates the impacts on some countries that have specifically linked the development of domestic carbon markets to the introduction of the CBAM.
Figure 1
